Tuesday, October 12, 2010

Increasingly, I am reading more and more feelings of unease about the American and global economy. Barry Ritholz's America needs an intervention is a typical sample about how America is living beyond its means:

The United States has been living a lie.

As a nation, we have been kidding ourselves, repeating myths, hoping that if we say something enough times, it will become reality — no matter how untrue. The credit crisis and now foreclosure debacle has revealed to anyone who cares to look what we have sought to ignore: That the past decade has been based on a set of fundamental beliefs that are intrinsically false.

Its time for an intervention. We need someone to force us to stop hitting the bottle, lose the bimbo, skip the dessert cart, visit the gym. Its time to stop bullshitting ourselves about Financial Engineering, and face both the Truth & Consequences of our legacy financial system.

Tim Knight at the Slope of Hope expressed his unease about the current market backdrop in his post The Looming Something:

There will come an event that will - probably very quickly - bring forth the unintended consequences of all this unprecedented action, and the Something will be reviled instead of embraced.

I feel like I am watching a horror movie and the creepy music is starting to build...and it's building to a crescendo. But what will be the trigger for the collapse?

Watch the November 3rd FOMC meeting
One trigger might be the FOMC meeting on November 3, 2010. Already there is global anxiety about currency wars - so much anxiety that the IMF has been asked to intervene and mediate. Tim Duy has indicated that should the Federal Reserve choose to implement another round of quantitative easing on November 3, it would mean the end of Bretton Woods 2:

[T]he Federal Reserve is positioned to declare war on Bretton Woods 2. November 3, 2010. Mark it on your calendars...

Consider the enormity of the situation at hand. The Federal Reserve is poised to crank up the printing press for the sake of satisfying their domestic mandate. One mechanism, perhaps the only mechanism, by which we can expect meaningful, sustained reversal from the current set of imbalances is via a significant depreciation of the dollar. The rest of the world appears prepared to fight the Fed because they know no other path.

Should QE2 mark the end of Bretton Woods 2, it would mark a global regime shift. Global regime shifts are not orderly events. There will be turmoil and volatility. Tim Duy writes:

The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly.

Although asset prices may be buoyant at the moment, there are other risks ahead. Competitive devaluation is an inherently unstable system. Someone must lose their share of world trade. And a policy of boosting exports can all too easily turn into a policy of blocking imports.

Investors should be prepared for this possibility. Don't say that this is another black swan event and no one foresaw this. You have been warned.

Welcome

Welcome to my blog Humble Student of the Markets. These are my observations and musings about the markets (mostly equities), hedge funds and investments in general.My experience has been a quantitative equity manager in US, Canada, EAFE and Emerging Markets and commentator on hedge funds and their returns patterns.

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